This is the second post in our series regarding coverage issues affecting emerging companies. This post addresses the insurance application process. The application is a critical part of the process because insurance companies use it to assess whether they want to take on the risk, and if so how much premium to charge. The carrier can attempt to rescind an insurance policy if there was a material (but not necessarily intentional) misstatement or omission of fact in the application. Rescission of an insurance policy means it is as if the policy was never issued and the policyholder simply gets a refund of the premium paid and the carrier walks away.

First, it is critical to understand that an insurance application is not a form that can be completed by anybody in your organization. For many policies, the application will be attached and actually become part of the policy when it is issued. When a claim is made, the application will be one of the first places the carrier looks to see whether the insured is entitled to coverage or vulnerable to a rescission claim.

Continue Reading Insurance for Emerging Companies: Understand the Application You Are Signing

Policyholders seeking insurance funds to settle a case often face an insurer’s demand that some amount should be allocated to uncovered claims or parties. The issue arises often under directors and officers liability (D&O) policies, when settlements resolve the liability of covered directors and the uncovered company. But general and professional liability and errors and omissions insurers also demand to allocate settlements.

Read the full article here.

Policyholders seeking insurance funds to settle a case often face an insurer’s demand that some amount should be allocated to uncovered claims or parties.  The issue arises often under directors and officers liability (D&O) policies, when settlements resolve the liability of covered directors and the uncovered company.  But general liability insurers also demand to “allocate” settlements, suggesting, for example, that half of the settlement is uncovered because the complaint alleges both negligent and intentional conduct.  Surprisingly, California courts have not clearly addressed the issue outside of the D&O context.  How should you respond? 

For D&O policies, courts first recognized the “larger settlement rule” in Harbor Ins. Co. v. Cont’l Bank Corp., 922 F.2d 357, 368 (7th Cir. 1990).  The question there was how to allocate a settlement between the potential liability of the covered directors and officers, and of the uncovered company.  The court held that the insurer is liable for the entire settlement, except for the amount, if any, by which the settlement was made larger because of claims against uninsured parties.  In other words, if the same dollars were paid to settle the potential liability of both, those dollars must be allocated to the covered claims against the directors and officers.

The Ninth Circuit affirmed the larger settlement rule in Nordstrom, Inc. v. Chubb & Sons, Inc., 54 F.3d 1424, 1433 (9th Cir. 1995) (Washington law); and Safeway Stores, Inc. v. Nat’l Union Fire Ins. Co., 64 F.3d 1282, 1287 88 (9th Cir. 1995) (California law).

Continue Reading Policyholders Should Resist Insurer Demands to Allocate Settlements

No one insurance policy covers all liability risks. Risk managers expect to purchase several types or layers of insurance to cover different types of insurance liabilities, to provide sufficient limits for a catastrophe loss, or to provide coverage over multiple policy years. They may be surprised to learn however, that what they thought was a comprehensive and seamless program in fact contains glaring but avoidable gaps.

Consider the following: 

  1. A social networking site for minors purchases an insurance policy which contains a “Technology, Media and Professional Services” component defining “Professional Services” as “providing advertising services for others, for a fee.” The same policy also includes a D&O component which excludes coverage for any claim “based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the rendering or failing to render professional services.” “Professional services” is not defined in the D&O component. Consumers complain that the site contains inappropriate content, and the State Attorney General sues the site for false advertising, alleging it misrepresented its efforts to protect minors from inappropriate content. The insurer denies coverage under the Technology, Media, Professional and Services component of the policy because the claim does not relate to the site’s “paid provision of advertising to others,” i.e., the claims do not allege covered “Professional Services” (the defined term).  It also denies coverage under the D&O component on the grounds that the “professional services” (the undefined term) exclusion extends to all services involved in operating the website. Surprisingly, the liability does not fall under either policy because the coverage grant in the professional services coverage was not broad enough to pick up the services the court found were excluded under the D&O coverage.

Continue Reading Mind the Gap! Avoiding Unexpected Gaps in Insurance Programs

A law firm asked us for advice a few months into a fast-moving intellectual property lawsuit.  The complaint alleged trademark and copyright infringement claims against the company and two of its officers.  They noted that while the defense was being provided under the D&O policy based on the allegations against the individual officers, plaintiff had only served the company.  The judge was now putting pressure on plaintiffs to “clean up the pleadings” and either serve the individuals or dismiss them. 

We immediately told defense counsel to call plaintiffs and offer to accept service on behalf of the individuals.  Why?  Because private company D&O policies provide broad coverage for the individuals, including for intellectual property claims.  For these claims, individuals are covered but the company is not.  A dismissal of the individuals would give the insurer an excuse to withdraw the defense.  Unfortunately, plaintiffs that same day had already filed a dismissal of the individuals without prejudice.  As expected, the insurer withdrew its defense over our protests.

Continue Reading A Zealous Defense Can Affect Insurance Coverage

An automatic stay in bankruptcy prevents anyone from accessing the property of the debtor estate, including the directors’ and officers’ liability (D&O) policies which insure individual directors and officers of the estate as well as the debtor.  That does not mean, however, that the policy limits can be treated as a slush fund to satisfy creditors’ claims against the estate.  The policy limits (or proceeds) remain available to settle covered liability claims against the covered individuals or, if they exist, covered liability claims against the company which survive the bankruptcy proceeding. 

In deciding whether the D&O policy proceeds are subject to the stay, courts look to whether the policy only provides coverage to directors and officers (Side A coverage), or whether it also provides coverage to the debtor (Side B coverage or Side C coverage).  In the former case, the proceeds are not considered property of the estate.  However, if the individuals and the company both maintain legitimate claims for coverage under Side B or C of the policy, the result can turn on the specific facts unique to the case.  See In re Mila, 423 B.R. 537, 543 (9th Cir. BAP 2010).  Where the individuals and the estate have legitimate competing claims against the policy, “the bankruptcy court must balance the harm to the debtor if the stay is modified with the harm to the directors and officers if they are prevented from executing their rights to defense costs.”  Even in cases where the D&O policy proceeds are considered property of the estate, courts may nonetheless grant relief from the stay “to allow the insurer to advance defense costs payments when the harms weigh more heavily against the directors or officers than the debtor.”  Id. at 544.

Continue Reading Accessing The D&O Liability Coverage of a Bankrupt Corporation

We recently litigated and successfully settled an insurance coverage case that offers a model for managing a case thoughtfully. Too often, parties reflexively dive into litigation with its procedural hurdles and delays, unbounded discovery, and often unnecessary motion practice, without considering whether a more efficient but fair alternative exists. Our group regularly seeks to fashion a sensible case-specific dispute resolution process at the outset. These models also allow us to offer creative fee arrangements that build incentives to optimize the costs and recoveries for the client.

Our client company and its officers were named in an intellectual property lawsuit. The same insurer provided CGL and D&O policies. It denied coverage under the CGL. It initially agreed to defend under the D&O policy but later withdrew its defense over our objections.

Continue Reading Mindful Case Management

A five-paragraph opinion by the New York Appellate Division suggests the potentially devastating consequences of ignoring the fine print of Directors & Officers Liability insurance policies. In Associated Community Bancorp., Inc., et al. v. St. Paul Mercury Ins. Co., 2014 NY Slip Op 04697 (App. Div., First Dept.), the court held that a bank caught up in the Madoff debacle had no coverage, not even for defense costs, for investor claims.

The court devoted one paragraph to each of the four exclusions which it found eliminated coverage for the investors’ claims. Three of those exclusions are fairly unique to Bankers Professional Liability Insurance Policies and are not found in most D&O policies. However, the Court’s final ground for denying coverage was the policy’s “Personal Profit and Advantage Exclusion” (often called the Profit/Advantage Exclusion).

Continue Reading D&O Coverage: The Devil Is In the Details

The U.S. Supreme Court’s recent decision in Halliburton Co. v. Erica P. John Fund, Inc. is not the game changer for securities litigation that some hoped for, but D&O insurers will be keeping a close eye on securities cases to see whether the decision increases defense costs or changes settlement calculations. 

In Halliburton, the Supreme Court refused to overturn its decision in Basic Inc. v. Levinson, which held that plaintiffs in securities class actions do not need to prove that the class members actually relied on the alleged misrepresentations at issue.  The Court did rule, however, that defendants can now challenge the presumption that the alleged fraud affected share prices at the class certification stage.  The ruling does not give defendants a new right as they were free to challenge the “price impact” presumption after class certification through summary judgment or at trial, but it does mean that defendants can mount this challenge earlier.  Doing so would increase up-front litigation costs, resulting in self-insured retentions being eroded more quickly and implicating D&O coverage at an earlier point.  

Continue Reading Halliburton Decision May Drive Up Litigation Costs and Impact Settlement

Over the past few days, there has been much hand-wringing over the Second Circuit’s decision in Mehdi Ali v. Federal Insurance Co., __ F.2d __ (2d Cir. 2013) in which the court declined to extend the holding of Zeig v. Massachusetts Bonding & Insurance Co. , 23 F.2d 665 (2d Cir. 1928), to the specific facts of the case before it. Commentators are chalking it up as a major victory for insurers, claiming that policyholders have now lost a key precedent, one which had previously allowed them to argue that an excess insurer can be required “drop down” to cover losses below its attachment point.

Not so fast.

As an initial matter, the Zeig case does not stand for the proposition described above. The Zeig case held that an excess insurer could be required to pay losses above its attachment point, if the insured had actually sustained those losses. In Zeig, an insured suffered a property loss which exceeded the limits of his primary policy, but settled with that insurer for less than the full primary policy limits. The Second Circuit reasoned that, because the insured could demonstrate that it had actually suffered property losses in excess of the primary limits, the excess insurer could be required to pay that portion of the loss which exceeded its attachment point.

Continue Reading Recent Media Coverage Overstates Impact of New Second Circuit Case Regarding “Drop-Down” Issue